Conveyor belt denim production

Fashion trends have always been dictated by the catwalks and clipboards of European designers. Countries such as France, Italy and Spain produce the patternmaking, prints, washes and trends for the fabrics that will shortly be on store shelves in the rest of the world.
To get closer to this strategic market, the Brazilian company Vicunha Têxtil, one of the world's largest manufacturers of denim fabrics, twills, knitted fabrics, filaments and fibers, has an operating base in Switzerland, in the small city of Gland, located between Lausanne and Geneva. It's there where Thomas Dislich, a Brazilian with German roots, serves clients from all over Europe and is looking to gain market share in the still incipient postcrisis economic recovery. Its main weapon is its speed in meeting orders. The global recession put buyers on the back foot, leading them to cease making purchasing decisions at the right time. "But now, they are seeing empty store shelves and need to make orders quickly", he says.

Vicunha Europa is working hard on marketing the concept of quick delivery to its clients - a concept that it terms "denim and flats in three days" - to compete with its Asian rivals (especially Chinese and Indian). This quick delivery time is also important in capturing innovative clients such as Zara (one of the brands of the Spanish group Inditex). The Zara store chain, an international growth phenomenon in recent decades, has created a business model anchored on constantly renewed fashion collections, based on current trends. "If a given product is selling like hotcakes, they start producing faster", says Dislich. "For this strategy to be successful, they also need a fast supplier".

Favorable geographical location

How is Vicunha Europa able to deliver the orders with the promised speed? To start with, it exploits its geographical advantage of producing in South America. All of its fabrics sold in the European market are shipped at the Port of Mucuripe (in Fortaleza, Ceará state), the last Brazilian stopover for ships headed to Europe. The company's production mainly takes place at its plants in Ceará and Rio Grande do Norte - it also has plants in São Paulo, and recently installed a plant in Ecuador. The trip from Brazil's Northeast to the Port of Rotterdam (Holland) takes 9-12 days, while Asian manufacturers ´ fabrics take 40 days, on average, to reach the same destination.

In Rotterdam, the logistics center of Europe, Vicunha has a central warehouse that receives deliveries twice a week. With a regular inventory of 3 million meters of denim fabrics and a million meters of cotton in Europe, the company can rapidly meet the demands of any client. An exporter since the early 1980s, Vicunha Têxtil has subsidiaries in the U.S., Argentina, China and (of course) Europe. It has annual revenue of R$ 1.38bn and exports around 30% of its production.

Its Swiss office in Gland controls the European arm of this complex distribution network. Dislich, fluent in six languages, works alongside 10 employees from various nationalities and 40 outsourced workers. "You have to speak the language and, mainly, know the culture of your clients´ country to be able to provide a good service and offer the most adequate product", he says.
Nevertheless, the last two years have been tough for Vicunha Europa. Due to an over-appreciated Brazilian Real, Brazilian fabrics have become expensive, and sales fell from 2007 to 2008. This year, due to the economic contraction, a stronger sales effort is required. "The crisis affects everyone and today we have to fight twice as hard to close an order", says Dislich. "The consumption environment has taken a hit but, as far as I know, our plants are the only ones in the sector still operating at 100% capacity".

In the crisis, quality is also a crucial weapon. As well as Inditex (of Zara), Vicunha supplies fabrics to brands such as H&M, Benetton, Mango, Replay, Tommy Hilfiger, Calvin Klein, Diesel and DKNY. To establish its
differential vis-à-vis Asian competitors, the company seeks to offer fabrics with special prints and innovative
patternmaking each season. Vicunha’s designers and textile engineers are now working with fabrics for the 2011 winter season.“We seek to be creators and not copiers of fashion”, says Dislich. The new products will be launched in June 2010 at Denim by Première Vision, the mega-event held in Paris to present the latest evelopments in the global textile market. However, the emergence of noncentral countries, such as China, ussia, the Arab economies and other Asian countries is intensifying the debate on the degree of support provided to companies. And the cries of complaint are mainly coming from the developed economies.

To illustrate the point, we can say that there are two internationalization models practiced today: the model of the so-called state capitalist countries; and the model of the OECD countries. In theory, the first model is based on the strong and direct participation of government bodies and governments themselves in supporting companies that, in turn, are either state-owned companies or joint ventures of stateowned companies. The OECD model, in theory, features more horizontal government actions to foster the competitiveness of companies, whose modus operandi is typically more compatible with international agreements and corporate governance standards - although, in several cases, there is no denying that OECD countries provide direct support to their multinational companies.

Uncovering the East

Vicunha Têxtil has monthly production capacity for 12 million meters of denim fabrics and twills, as well as other fabrics, which, according to Dislich, makes it one of the few manufacturers in the world with the size to supply different markets. And although sales in Europe represent only 7% of the revenues of Vicunha Têxtil´s denim segment, the segment has proven to be a promising formula for the company.

Dislich recently assumed control of the Asian subsidiary of Vicunha, in Shanghai, where the company plans to implement the operational model used in Europe. However, it acknowledges that Asia has a very complex domestic market. "China, for example, is immense, dynamic and attractive, but completely different from our reality", he says. We are talking about the world's second largest textile manufacturer today - the top eight are Brazil, China, Egypt, India, Italy, South Korea, Turkey and the U.S. In Asia, Dislich wants to a have a response capacity as fast as in Europe, to be able to offer the main brands´ Asian subsidiaries and retail store chains the same product sold in European stores. "The future of Vicunha is as a global company, serving global clients", concludes Dislich.

As a result, the challenge facing Brazil is to define a strategy of strong internationalization, but which at the same time is compatible with its economic and political conditions. And now is the time, since Brazil is in a relatively healthy financial situation and several of its public institutions are interested in the matter.

Besides the need for coordination between the existing initiatives, two questions are a priority: (i) to strengthen the financial mechanisms for supporting companies; and (ii) defining a strategy for high-tech, innovationbased sectors. In relation to FDI (foreign direct investment) remittances abroad, there are practically no restrictions on Brazilian multinationals.

However, Brazil doesn't have many agreements that protect direct investments in other economies. Numerous bilateral and regional (Mercosul) agreements have been signed, but they haven't taken effect. The situation is slightly less critical for services companies, since Brazil is a GATS signatory (a WTO-related agreement). In terms of intellectual property, it is a signatory of TRIPS (WTO), and of the patent treaty of the World Intellectual Property Organization. But there is no international protection for brands of Brazilian companies.

Brazilian government agencies do provide technical and information assistance, especially Apex (Pro-Exports and Pro-Investment Agency) and Itamaraty (Foreign Affairs Ministry). But there is no question that these services could be expanded and professionalized.
Financing internationalization projects has been the main support policy provided to Brazilian companies, but this is concentrated at the BNDES. Brazil needs to foster the development of services and financial solutions by private banks and by the stock exchange. There are no safety mechanisms for investments abroadan important exception is the ALADI Reciprocal Credit Agreement.

Brazil is very passive when it comes to tax incentives in this area, which practically don't exist. There are, however, non-conventional initiatives to support internationalization, such as those provided by Cade/SDE (Brazilian Monopoly Watchdog), state-run oil giant Petrobras and state-owned bank Banco do Brasil in other countries, and presidential diplomacy itself. So, as we can see, there are initiatives in place. However, they are partly an extension or "reform" of previous actions to promote exports, and partly one-time government initiatives.
Brazil is on the path to incorporating the internationalization of the economy and of companies as a strategy for development. With this aim in mind, the matter needs to extrapolate the federal government and form part of the Legislative agenda, gaining state policy overtones. At the same time, this question should influence negotiation strategies in the bilateral, regional and multilateral spheres, which has yet to happen.

The matter isn't only of interest to large companies and a handful of sectors. Recent studies indicate that internationalization is already permeating the agenda of several mediumsize sectors and companies. Moreover, multinationals will continue to go international and drag along with them smaller companies, who will also exert pressure for progress.

* Partner director of Prospectiva Consultoria em Negócios Internacionais e Políticas Públicas and Professor of International Relations at Pontifícia Universidade Católica de São Paulo (PUC-SP).

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